No Selling Follow Through – Random Price Action In Light Volume – Protect Capital!

Yesterday, the market floundered around and it tested both sides before rallying in the last hour. News that Spain's credit rating might be downgraded did not faze the market. The news has been very light this week with the biggest economic release coming this morning. Initial jobless claims showed that 475,000 people filed for unemployment last week. That is much higher than the 455,000 analysts had expected. As I have been pointing out, employers postpone laying people off during holidays and workers tend to delay filing. I believe the jobs picture was not as good as it appeared over Thanksgiving and now it is self-correcting. The price action has been very choppy and we are trading randomly from SPY 108 - 112. Big down days have been followed by big rallies and there are gaps everywhere. The upward momentum has slowed and resistance is building at the highs of the year. Each time we have tried to break through, profit taking sets in. In the last week, renewed credit worries have sparked a rally in the dollar. Dubai World, Greece and Spain all have credit issues. Eastern Europe is also in bad shape and Latvia is on the brink of default. Individually, these issues are minor. Collectively, they can start a domino effect throughout global credit markets. To put credit issues into perspective, the EU's GDP would have to rise by almost 3% to service its debt in 2010. Consensus estimates are for growth in the 2% to 2.5% range. This means that collectively, EU will be running big deficits next year. We have avoided a financial collapse, but we are far from out of the woods. I question the entire global expansion theory. If activity was expanding, the demand for oil would instantly shoot higher. There is not much lag time since it is the fabric to every economy. The demand for oil has been soft and this contradicts the robust numbers that have been released. Countries have printed money to stimulate their economies and they have fired all of their bullets. Next year we will see if organic growth exists. This week, Japan's GDP was revised down to 1.3% for Q3. Capital expenditures were down 25% in November and businesses are not reinvesting. For a country that sits at China's doorstep, this does not seem like much of a recovery. Interest rates are low, earnings have been decent and economic numbers are "less bad". Seasonal strength should push us higher, but profit-taking has set in. After a 65% rally from the March low, traders are taking this opportunity to lighten positions. Furthermore, Asset Managers are no longer worried that they will miss a year-end rally. They will not chase the market and those who are under allocated will only buy on a pullback. I thought we might get a few days of weakness after the Unemployment Report failed to produce a breakout. That was not the case and buyers stepped back in once the dollar rally stalled. I know that I am fighting seasonal strength so I have to temper my bearishness. Wall Street would love to see the market close right here so that hefty bonus checks can be cut. Even a small bid can support this market in light volume. The market has backed off of its highs this morning and we saw early selling pressure during the first 30 minutes of trading. If buyers can stage a breakout above SPY 111.20 (the high this morning) I will exit my bearish put positions. I will still hang in to my call credit spreads since they are out of the money. Only a breakout to new highs would force me to cover. If sellers can keep a lid on this market, we could see afternoon selling. This light volume battle will likely be decided late in the day. Random markets are difficult to trade, but I sense that conditions are changing. As much as I want to stay short, I need to protect capital. I have placed my stops so that I can emotionally remove myself from the trade. Tomorrow, retail sales will be released. The results have been relatively weak and this could weigh on the market. Retailers are priced for a good season (RTH is near its high for the year) and there is room for disappointment. Next week’s events are highlighted by the CPI, PPI and the FOMC. If the Unemployment Report could not generate a sustained move, these releases are not likely to. Be patient – protect capital.

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